Impact of Uncertainty Shocks on Income and Wealth Inequality

We study the distributional consequences of uncertainty shocks in the U.S. economy at a business cycle frequency. We document that the effects of uncertainty shocks are highly heterogeneous across income and wealth distribution and also vary depending on the sources of uncertainty. First, uncertainty shocks tend to have a more adverse effect on income at the top and bottom of the distribution spectrum resulting in narrower income inequality between the rich and the middle class but wider inequality between the middle class and the poor. Second, once the redistribution policy is considered, uncertainty shocks do reduce income inequality. Third, the distributional consequences for wealth differ from those for income, as uncertainty shocks are relatively beneficial to both the middle class and the poor. Fourth, the COVID-19 pandemic has brought different implications on wealth inequality between Wall Street and Main Street uncertainty; whereas the former reduces wealth inequality through its particularly adverse effect on risky asset prices, the latter uncertainty increases it by damaging the labor market.